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Chapter 17

Interwar Economics:
An Impossible Balance

The significant changes in territorial boundaries in central and southeastern Europe as prescribed by the treaties of 1919-1920 resulted in the breakdown of existing economic systems. The birth of new states eager to protect their independence resulted in tighter border controls, with economic controls not far behind. Unwieldy customs and currency restrictions, magnified by tariff wars, caused a variety of problems in the years immediately following the war for private citizens as well as for countries.

One of the most striking features in the economic situation of eastern Europe after the war was the unequal economic development of the various countries. In terms of industrial development, Czechoslovakia was roughly equal to the industrialized nations of western Europe, and resembled Germany in the relatively small role that agriculture played. The other east-central European countries, however, were heavily dependent on agriculture. In Hungary, 51 percent of the work force was employed in agriculture, while in Albania the figure reached 80 percent, with the other countries falling somewhere in between. Even among these predominantly agricultural states however, Hungary and Poland had sizable industrial sectors which distinguished them from their Bulgarian, Rumanian, Yugoslavian, and Albanian neighbors. Nearly everywhere at this time, large estates employing many farm workers and seasonal laborers coexisted with numerous small farms that did not always make a viable profit, although in

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Bulgaria and former Serbia medium-sized and family-owned farms were more successful.

Energy and mineral resources were also unevenly distributed. Coal was abundant in Czechoslovakia and Rumania, as was lignite in Hungary. Hydro-electric potential was most evident in the Slovakian and Transylvanian Carpathians, while Rumania's potential energy base was petroleum. Ore was unequally distributed as well; Czechoslovakia and Poland possessed iron, but Hungary and Yugoslavia had bauxite. Gold and silver, the precious metals that had once made the fortunes of Bohemia and Hungary, were exhausted with the exception of a few remaining traces in Czechoslovakia and Transylvania.

After the war, all of the states of central and southeastern Europe desired economic self-sufficiency, for both ideological and financial considerations. Attempting to protect their weaker sectors with customs duties and other protectionist measures, they also attempted to minimize their external debt by confining themselves solely to their national resources. Such policies quickly led to reduced trade between countries as well as a reorientation of business and commerce to a form considered more suitable for the new national boundaries. The result was economic stagnation, which worsened as economic relations between the nations deteriorated. Czechoslovakia imposed high customs duties on agricultural imports from Hungary and Poland, and Hungary and Poland reciprocated, attempting to protect their barely-competitive industries from foreign competition.

The new borders had been settled upon without full consideration of the economic dislocations they would cause. This was most evident in the countries carved out of the former Austro-Hungarian Empire, as the new boundaries separated regions with complementary economies and resources. In several cases the borders separated regions producing ore and energy from the industrial regions that used them: the partition of Upper Silesia in 1921, for example, left the coal mines and metallurgy factories in German possession, while Poland obtained the copper and iron mines.

The Great Powers deftly turned such situations to their own advantage, investing heavily in eastern European countries. As few limitations on the use of foreign capital existed at this time, they were able to take control of mining resources. French and English capital was concentrated in Rumania, Czechoslovakia and Yugoslavia; Poland was dominated by German, Austrian, and English capital; and Hungary was controlled mainly by German and English capital.

The new borders also disturbed the traditional worker migration patterns. The Ruthenian and Slovak mountain peoples, who had always gone to neighboring Hungary as seasonal agricultural workers in the summer, abruptly lost their job opportunities. Consequently, social and economic

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conditions in eastern Slovakia and Carpathian Ruthenia worsened progressively, and the population emigrated in increasing numbers to western Europe since Bohemia was not able to provide enough work. This is only one of the many examples of the peace treaties' failure to provide for a measure of economic cooperation and coordination between countries.

The war's losers were not the only ones to suffer economic dislocations and troubles in the 1920s. It was more than a simple "reconversion crisis"; the prewar monetary system was completely disorganized, and the rapid depreciation of several linked currencies -- the Austro-Hungarian crown, the German mark, and the Russian ruble -- put a lasting damper on economic activity. In some countries, like Poland, there were as many as three different currencies in circulation in 1919-1920.

After 1920, however, the east-central nations began, more or less successfully, to put their monetary systems in order. One by one, currencies were stabilized with the help of foreign loans, often obtained through the efforts of the League of Nations. However, as the nations still followed the precepts of the gold standard, their currencies were valued at a figure far below their prewar level. The new states' problems were not all monetary: nations were faced with massive unemployment and popular discontent, as hundreds of thousands of demobilized soldiers sought to return to the work force. The problem was most severe in the defeated countries, whose military forces were strictly limited by treaty, and who also had to absorb thousands of government employees and private citizens expelled from areas annexed by the victorious countries. Despite quota laws imposed by the United States in 1921 and 1924, emigration eased the unemployment problem somewhat. The mainstream of labor refugees went to France, which was plagued by a shortage of laborers needed for reconstruction. Thousands of Poles, Slovaks, Ruthenians, Hungarians and Yugoslavs settled in France well into the 1920s.

All postwar eastern European governments attempted to address the serious issue of dismantling large land holdings. Systematic land reforms were adopted in Czechoslovakia in the winter of 1918-1919, and in Rumania as well as the new Yugoslavian territories in 1921. In all three countries, the reforms were specifically aimed at eliminating the German and Hungarian estate holders. In Czechoslovakia, the law limited the size of property to 250 hectares, while one million hectares confiscated from the large property owners were to be redistributed to small farmers and farm workers. But only the German property owners in Bohemia and the Hungarian owners in Slovakia and Ruthenia were affected by the land reform, as large estate owners of Czech origin were able to reclaim their lands after a period that generally did not exceed two years. The Rumanian land reform act of 1921 had the same nationalist slant. The law limited the maximum estate size to 500 hectares, and this limit was further reduced to 270 in the newly annexed

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territories in order to affect the Hungarian estate owners in Transylvania more than the Boyars in Moldavia and Wallachia. Elsewhere, land reform policies pursued similar measures, but more slowly and in piecemeal fashion. Poland in 1920 and 1925 and Hungary in 1920 and 1923 were examples of such incomplete reforms as in both of these countries the landed aristocracy retained nearly a third of all cultivated land in 1930. During the 1920s and 1930s, each country pursued an independent course of industrial development, but their customs barriers so slowed trade between neighboring countries that acquiring markets outside of eastern Europe was necessary. However, despite salaries low by western European standards, the prices of products manufactured in Hungary, Poland and even Czechoslovakia were not competitive because of outdated and inefficient production techniques. With the exception of a few specialized products, like Bata shoes or the machine tools and heavy machinery produced by Skoda in Czechoslovakia or Hungarian Tungsram lights, eastern European exports consisted of raw materials. The Danubian and Balkan countries exported grain, meat, and tobacco, while Bulgaria, Hungary, Poland and Yugoslavia produced minerals. Rumania's primary export was oil.

Economic cooperation between the eastern European countries would certainly have hastened postwar reconstruction. But the exaggerated nationalism of the treaties, beneficiaries and the bitterness of the defeated countries prevented attempts to unite for trade and customs purposes, even though limited trade between them had been established as early as 1920-1921. National chauvinism dominated this era in eastern Europe; although the countries of the Little Entente were closely united by political and military links, they refused to extend this cooperation to the economic arena.

The worldwide depression of the early 1930s severely damaged the tentative and fragile economic recovery that had begun in east-central Europe. The economic crisis affected all the countries in the region without exception. Markets were saturated with agricultural products and prices collapsed, buying power evaporated through inflation and the standard of living tumbled. In Hungary, the price of a quintal of wheat fell from 33 to nine pengo between 1928 and 1932, while in Rumania it fell from 500 to 180 lei. Raw materials followed a similar course, and the export of agricultural products and raw materials became increasingly unprofitable and hazardous. The large established exporters in the United States and Canada were better organized to sell their agricultural surpluses, and increased their market shares at the expense of the east-central nations. Because of this and a low demand for raw materials due to the industrial slowdown, protectionist measures proliferated everywhere, excluding eastern European producers

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from nearly every export market. Protectionism resulted in an unequal balance of trade and balance of payments, and the failure of the Viennese Kreditanstalt bank in May, 1931 , followed by several German banks closely linked to eastern European banks, dealt yet another blow to the weakened currencies.

Unemployment had remained latent in these countries since the early 1920s due to the tempering effect of emigration. As traditionally open countries closed their doors one after another to both immigrants and guest workers, unemployment shot up, cutting a wide swath through the work force; all fields, ranging from farm and industrial workers to office employees, felt the impact. In Poland in early 1933, 780,000 of the 1,800,000 workers usually employed in industry were permanently laid off, and industrial production was 50 percent of the 1929 level. In Hungary, a third of the industrial work force was either partially or completely unemployed, and most young graduates of higher education found themselves in similar circumstances. Even Czechoslovakia, previously considered a viable indus- trial force, suffered; in 1932-33, unemployment reached nearly one million, while exports fell by nearly two-thirds.

Protectionism and isolationism did not arise unchallenged. Despite popular pressures for such measures, some political leaders sought to establish a minimum of cooperation between countries that had formerly been part of the Austro-Hungarian Empire. Under the aegis of the League of Nations, the French government presented two plans the most famous of which was the Tardieu Plan. The Tardieu Plan called for the progressive lifting of customs barriers between the Danubian countries, and the creation of an economic bloc made up of Austria, Czechoslovakia, and Hungary, to be followed later by Yugoslavia and Rumania. The idea was not new; the Hungarian economist Elemer Hantos had written profusely and delivered numerous addresses in favor of a Danubian common market.

All the attempts to form a customs union ended in failure for a multiplicity of reasons. First, political tension between the victorious and the defeated nations hindered negotiations, while the thorny question of national minorities posed a major obstacle to any rapprochement between old enemies. For Hungary, improving the conditions for Hungarian minorities in the countries of the Little Entente was a stipulation for any opening of negotiations. The countries of the Little Entente, however, had no intention of altering their policies affecting minorities until after an economic agreement had been reached. In addition, Italy and Germany did not see the Tardieu Plan as working in favor of their ambitions and interests, and did all in their power to subvert the Plan. For Germany in particular, eastern Europe was a vital zone for the supply of foodstuffs and raw materials, as well as serving as a market for German manufactured products defined by

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barter agreements. From 1933 on, the German government sought and concluded trade agreements with most of the Danubian and Balkan countries with such efficiency that by 1937 Germany had become the primary trading partner of every country in east-central Europe. Germany had realized that economic ties were the most effective mechanism to bring them into its sphere of influence instead of France or Great Britain.

To conclude, it was the inability of ultra-nationalists in eastern Europe to find a modus vivendi between themselves and other interest groups that opened eastern Europe to Germany's national socialist hegemony. Once again, the void left by the disappearance of the Austro-Hungarian Empire was all too apparent: it was a void that Hitler would not hesitate to fill.

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